Organizations receiving federal funds must comply with the Uniform Guidance, 2 CFR Part 200, covering the policies and practices of the federal government. In this article, we cover the standards and criteria for documenting personnel expenses — commonly known as time and effort reporting — as set out by the Office of Management and Budget (OMB).
There are two fundamental standards governing the compensation of employees paid from federal funds. First, pay for employees working on federal funds must be consistent with compensation for similar work at comparable organizations or in the region. Second, employee compensation must serve a purpose permissible under the specific federal regulations and requirements attached to those funds.
In recent years, the OMB has shifted toward encouraging recipients of federal funds to build their own internal controls, rather than requiring standardized reports like the traditional Personnel Activity Report (PAR). What OMB does emphasize is that organizations need some tool or process to accurately report all fund-related personnel expenses, with evidence of the work or service actually provided. It’s worth noting that OMB frames these as guidelines, not hard regulations — but it is specific about the criteria those reports need to meet:
- Reports must comply with the organization’s own internal policies and practices.
- Reports must be backed by an internal control system that gives reasonable assurance the time billed to grants is properly allocated, allowable under the relevant regulations, and accurate.
- Reports must be incorporated into the entity’s official payroll records.
- Reports must reasonably reflect the employee’s total compensated activity.
- Reports must cover both federally funded and other compensated activities in an integrated way (subsidiary records are allowed).
- Reports must distribute salary appropriately for employees paid from two or more federal funds, or who split time between federal and non-federal activities.
Budget estimates can still be used for interim accounting purposes. If an organization uses budget estimates to bill federal grants, the system used to produce those estimates has to generate reasonable approximations, and any significant change in an employee’s actual work activity must be identified and adjusted accordingly. Internal controls also need a process for reviewing post-event charges against those budgetary estimates — the goal being to make sure the final amounts charged to grants are accurate, allowable, and properly allocated.
For fiscal clarity, organizations that currently process payroll and document effort through the same process benefit from separating the two, particularly when not every employee works on grants. These newer, principles-based criteria give organizations more flexibility to design systems that fit their needs, as long as the underlying principles are met — but that flexibility cuts both ways. The lack of a standardized format can make it harder for federal agencies to evaluate whether an organization’s internal controls are properly designed, and if an agency determines that an organization’s records don’t meet the criteria above, it can require employee activity reports to validate the documentation on file. Meeting these criteria doesn’t necessarily require overhauling your existing processes or reporting systems — many organizations already have adequate internal controls around documenting staff compensation. Even so, organizations should periodically review whether their existing systems still meet the criteria, since future changes may require strengthening time and effort controls to stay compliant with the general requirements that apply to your organization.